If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
12/06/2007 12:00 am EST
December 6, 2007
Two things were clear at last week's World Money Show in London: the US dollar doesn't buy you much, and global investing is more popular than ever.
The first may seem painfully obvious to you, but trust me, it's very different to read about it and to live it.
London is already one of the world's most expensive cities, but every time we changed dollars into pounds we felt poorer.
The official exchange rate was about $2.06 to the pound. We paid as much as $2.26 to convert our greenbacks into sterling, much, much higher than on previous trips.
We had taken a few days' holiday before the Money Show, and it was hard to get away with paying less than $100 for dinner for two adults and a child in even moderately priced restaurants. As for hotels, forget it.
Although many of the experts whom I interviewed at the Show expected the dollar to go still lower, it's looking way oversold to me-and to people like John Christy even after Wednesday's strong US economic reports triggered a rally in the greenback against the euro, yen and pound.
Despite the subprime mess, a credit crunch, and a housing bust, affluent consumers-the engines of consumer spending in the US-look in pretty good shape, and the real-world economy of US manufacturing, exporting, technology, and most services does not appear to be heading into a recession. In fact, export growth is helping narrow the US's huge current account deficit while inflationary pressures don't look too severe.
And I find the strength of the pound mystifying. Prime Minister Gordon Brown's Labour government is embroiled in scandal, the collapse of mortgage bank Northern Rock has cast a shadow across the whole financial sector, house prices are tumbling even in London's most gilded districts and the UK has a subprime crisis of its own. (A headline in Wednesday's Independent read: "Is Britain's Economy Heading for the Perfect Storm?")
So, the UK looks as if it's six to nine months behind us, and I can't imagine the pound will be able to withstand that. One shoe dropped Thursday when the Bank of England cut its key lending rate by 25 basis points, to 5.5%. More will come.
For some time, I've said the dollar was oversold, and so far I've been wrong (or early, to be charitable). This time, I do expect to see at least a temporary recovery, if not a long-term rebound.
One thing that does seem permanent is the move to invest overseas, and London, a global financial capital, is a great vantage point to observe it.
The UK is a short hop from continental Europe and of course has historical ties to the Commonwealth countries that once comprised the British Empire. So, professional British investors seem naturally inclined to invest globally, a trend that has hit the US only over the last couple of years.
Since October 2002-until the recent selloff-the Standard & Poor's 500 nearly doubled, the MSCI EAFE developed-market index did even better and the UK's FTSE 100 gained 86%.
Emerging markets, though, have been stellar performers: from its June 2005 lows to its recent peaks, the Shanghai Composite index skyrocketed 500%. India has risen nearly sixfold since October 2002, while Brazil's Bovespa index, the best performer of all, has shot up an amazing 1,200% since the dark days of the Russian ruble crisis of August 1998.
It's a classic case of "the last shall be first." Emerging markets, once the world economy's basket cases, are now posting the strongest economic growth by far-11% annually in China-while the US limps along at around 2% and the UK and Old Europe do only slightly better.
As these emerging countries become major economic powers, their demand for infrastructure, raw materials, and plain old bling has launched a new commodities supercycle: crude oil recently approached $100 a barrel, gold hit over $800 an ounce, copper and iron ore have soared, and some people predict they will continue rising for years.
That has been the way for investors to make money over the last five or six years: a portfolio consisting of commodities and emerging-market stocks did spectacularly well-if you were smart enough to invest there.
Now, as global growth slows, I think the easy money has been made on that trade, but global investing has become an article of faith among financial advisers.
Lately I've heard some experts advise US investors to put as much as 75% of their investable assets in overseas markets and commodities. That would work only if you expect the world economy to keep growing at a torrid pace and you think the US markets will remain laggards for years to come.
But the fact is that the US economy still plays a disproportionate role in determining the fate of even the fastest growing economies, as the Chinese government recently acknowledged. If the US economy weakens still more, it will take a big toll on the emerging markets as well, whose middle classes are nowhere near able to take up the slack. The recent 20% decline in the Shanghai Composite index may be reflecting that, and I think that for all intents and purposes, the great China bubble is over for now.
It would be ironic if the world's hottest performing major markets-China, Brazil, and India-start cooling down dramatically just as everybody is discovering them. Ironic, but hardly surprising.
But although we may be late in the game for the current surge in overseas markets, there's no escaping their dynamism and growth prospects for the long haul, nor the sea change that's taken place.
Ten years ago, Americans invested overwhelmingly in the US, and perhaps a few sophisticated institutions put 5% or 10% of their money into foreign stocks. Now individuals are investing in a broad array of global funds and ETFs or finding the world's best companies, regardless of the country in which they happen to have their headquarters.
In today's world, financial crisis is global, but so is growth. As the world gets "flatter," my problems become yours and vice versa-but, if they're handled right, we'll share each other's prosperity, too. Inflation, bear markets, even recessions may come and go, but the world economy and world markets are becoming more integrated every day.
There's no going back: from now on, all investing will be global.
Comments? Please email us at TopProsTopPicks@InterShow.com.
Howard R. Gold is executive editor of Top Pros' Top Picks. The opinions expressed here are his own and do not necessarily reflect the views of InterShow.
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